BoE Preview: Forecasts from 10 major banks, 25 bps or 50 bps? That is the question

We believe the MPC will hike by 25 bps at the August meeting to address the signs of more persistent inflationary pressures that have developed since the previous meeting. Namely, the continued overshoot in pay growth. Nevertheless, the other indicators of persistent services inflation and labour market tightness, have eased since the previous meeting, meaning a 50 bps hike could be avoided. After the August meeting, the data should still point to the need for more tightening but again by 25 bps to 5.5%. Thereafter, softening data are likely to convince the MPC that it has done enough to bring inflation under control, albeit slowly.

There’s just enough in the latest data flow for the Bank to be comfortable reverting back to a 25 bps hike in August. We shouldn’t rule out a 50 bps hike though, especially if the committee concludes they think they’ll hike again in September.

This meeting is a tricky one: incoming data and projections are likely to support a 25 bps hike, but the MPC may be tempted to repeat a 50 bps hike alongside a dovish lean to speed up their journey to terminal. They've signalled nothing about their intentions in recent weeks, either. Ultimately we think 25 bps will prevail, but it's a very close call.

We expect the BoE to hike the Bank Rate by 25 bps. We expect a peak in the Bank Rate of 5.50% with risks tilted to the upside. We see current market pricing of a peak in policy rates of 5.90% as too aggressive. EUR/GBP is set to move modestly higher on announcement. We do not expect the press conference to offer much further guidance than the written material.

With the inflation data having softened, there being more signs of an easing labour market (albeit from very tight levels in the first place) and some key surveys highlighting downside risks to the growth outlook, we think the Bank will be cautious and hike by a quarter point. Aside from the data, BoE guidance and uncertainties about policy lags also favour a 25 bps hike. We expect the discussion among the MPC to be primarily between 25 bps and 50 bps. The latter remains on the table because of above-normal service inflation, strong wage growth and a general view that inflation might prove stickier in the UK than elsewhere. Despite this, we think the stronger justifications for a smaller move will result in a 1-7-1 vote in favour of the decision for 25 bps (one member voting for no change, seven for 25 bps and one for 50 bps). After the August meeting, we expect further 25 bps hikes in September and November for a peak Bank Rate of 5.75%. We ultimately see rate cuts but not until the very end of 2024.

We expect the BoE to vote 8-1 to raise rates 50 bps at its August meeting from 5.0% to 5.5% on the back of elevated services inflation and record-high wage growth. However, given the recent fall in inflation, it is quite possible that the BoE hikes 25 bps, making the August decision a close call. One member (Swati Dhingra) is likely to vote for unchanged rates, but there are risks that if the majority vote is for 50 bps, one or two members vote for 25 bps.

The Bank of England still faces the difficult trade-off between reducing inflation and avoiding an unnecessarily deep recession. Our view remains that the BoE aims for a stance slightly more hawkish than the Fed or the ECB while avoiding any excess hawkishness. Though inflationary pressures persist, signs of slowing economic growth and initial progress on bringing inflation down support scaling back to a 25 bps hike. We expect a 2-6-1 vote split, with the core of the MPC preferring slower hikes while remaining explicitly vigilant on inflation. 

We expect a 25 bps hike taking the Bank Rate to 5.25%, although it is a close call between that and 50 bps. Beyond next week's decision, we see two more 25 bps hikes, with rate cuts potentially starting from Q2-24. 

We continue to look for a 50 bps hike to 5.50%, although the market’s conviction is waning after the ECB’s move away from the hawkish door. But remember: Britain’s 7.9% inflation rate is far higher than the Euro area’s 5.5% rate, and Governor Bailey (and Chancellor Hunt) has been under a microscope over his failure to rein inflation in. The BoE’s credibility is at stake, and it was glaringly obvious with the appointment of former Fed Chair Ben Bernanke to head up the review into the BoE’s forecasting. Less polite company would say an outsider was brought in to find out why the Bank was so wrong. It also helps that the MPC’s biggest dove is out and has been replaced with what seems like a hawk. There seem to be few reasons to downshift to 25 bps.

After a 7-2 vote to raise interest rates by 50 bps at the June meeting, slowing but still elevated inflation, along with slower activity growth, makes it a closer call as to whether the BoE will raise by 50 bps again in August, or lift rates by a smaller 25 bps increment. We still lean toward a 50 bps increase but acknowledge a 25 bps move is a distinct possibility (indeed, the consensus forecast is for a smaller quarter-point hike). We will also be paying attention to the BoE's updated economic projections for insight in the potential pace and magnitude of further monetary tightening beyond the August meeting.